How to Buy Shares of Stock in Startups
Disclaimer: this article was written by a person who does not work at any of the firms highlighted in this article. As always, past performance does not guarantee future results.
When it comes to investing in disruptive technologies, retail investors get the short end of the stick. The most exciting startups out there are off limits, unless you have a ton of cash to entrust with a venture capitalist who will decide which startups you ought to be invested in. Only when startups decide to sell shares to the public in the form of an “Initial Public Offering” (IPO) do retail investors get a chance to put some skin in the game. Sure, if you bought shares of Google on the first day of their IPO you’d be sitting pretty with a +1,634% return. We invested a small amount, then realized over time that you need to have money to make money. A few thousand dollars in the Google IPO does not result in life-changing returns, and we’re still stuck working 9-to-5 providing our lovely readers with loads of insightful research.
But, just imagine if you were able to buy those same shares way back in the day when Google wasn’t a household name, back when you could boogie to Mambo #5 on the dance floor without looking like a complete tool. That’s when things start to get a bit more interesting.
According to the bright minds at CB Insights, Google raised a Series B round of $12.5M each from Kleiner Perkins Caufield & Byers and Sequoia Capital in 1999. One year after the IPO, those equity stakes were up about +30,000%. You would be hard pressed not to sell at that point, right? Well, if you had the cajones to hold long and strong on a mere $2,500 punt in the Google Series B round, you’d be up to about $6,336,050 right now, a +253,442% return on your money. It’s not “eff you money” but it can get you a modest house in Palo Alto these days.
Loads of people – on Twitter mainly – seem to think they know better than venture capitalists, as we hear this constant weeping and gnashing of teeth about how “broken venture capital is”. If that’s the case, then we can expect to see loads of opportunities flying under the radar, and all the brilliant people out there who have identified “the next Microsoft” now need the ability to buy shares in their golden goose eggs. If we can tell you anything about retail investors, it’s that they love an exciting “get rich quick on this magic tech” story more than anyone else. Time after time, we’re inundated with emails on “how to buy shares in startup X, Y, or Z.” Today, we’re going to tell you how to buy shares of stock in startups by looking at, well, a bunch more startups.
We had a chat with the good people over at EquityZen and they postulated that most people in this space see it as a three-horse race: EquityZen, SharesPost, and Equidate. Let’s take a look at these three firms in order of funding taken in as of today, according to CrunchBase.
Founded in 2014, San Francisco-based startup Equidate has taken in $53.5 million in funding from some of the best angel investors in the world to develop a “stock market for private technology companies” that includes “proprietary data and information about thousands of private companies, including share prices, stock charts, investors, share counts, and valuations.” The method of determining the price of a startup’s shares is typically based on what the last investor in the door was willing to pay. That refers to a startup’s “valuation”, and when new investors buy shares at a discount to the last round it’s referred to as a “down round”. Here’s an example of Palantir shares going nowhere but up:
The Equidate platform contains some of the biggest names out there, and you’ll have to be an accredited investor (or current holder of shares) in order to participate. As for fees, baseline fee is 5% to the buyer, and 5% to the seller.
Founded in 2009, and also based out of the Bay Area, startup Sharespost has taken in $15 million in funding to build out a platform that ” fosters transparency by publishing private market data, research and valuation tools.” So far, the firm has transacted $4 billion in secondary market transactions in the shares of more than 200 leading technology companies. Their first disclosed funding round of $15 million came in this past June with the purpose of accelerating security token transactions, something we’ve talked about recently. If you’re not an accredited investor, take a look at their Sharespost 100 Fund. A minimum investment of $2,500 will get you exposure to the “top 100 companies in the venture asset class.” A cursory look at how the fund has performed so far is underwhelming:
Maybe that’s why they created the SharesPost Private Growth Index which tracks startups in technology-driven sectors. It’s performed a whole lot better managing to trounce both the S&P 500 and the Dow Jones U.S. Tech Index over the past three years.
Founded in 2013, New Yawk startup EquityZen has taken in $6.5 million in funding to build pretty much the same thing everyone else is building. That’s what we thought anyways, until Phil Haslett, co-founder and Head of Investments at EquityZen, sat down with us to talk about how EquityZen differs from their competitors. (Because we have an affiliate relationship with EquityZen, they get to chime in here.)
Like Sharespost, EquityZen also offers a fund that allows you to invest in multiple startups. The difference is that the EquityZen fund contains 10-20 pre-IPO technology startups as opposed to the 100 startups that the Sharespost fund contains. Sure, diversification is important, but in this case, EquityZen has an internal Investment Committee that defines their investment criteria at the outset of the fund (rules like +$50 million in funding, +$500 million in valuation, etc.). Then, they conduct their own research on each of the live offerings on their platform to determine whether they are a sound investment for the fund.
The other distinction to be made here is that all the EquityZen investments are made with issuer approval, which is a significant difference from some of their competitors. EquityZen invests a great deal of time in developing relationships with startups who issue these pre-IPO shares so that accredited investors can be confident that the price they pay for their shares reflects the present-day valuation based on what other investors have been paying for shares. EquityZen believes that it’s a whole lot safer than buying shares from some other firm where the price-per-share reflects some arbitrary value. When you buy shares on a secondary market, you are putting a great deal of trust in the intermediary firm. In this case, the startups who are selling shares are also showing that they trust EquityZen which is a big vote of confidence.
We didn’t invest our money on any of these platforms because we can barely afford to pay for all the MBAs we have on staff. Instead, we just signed up with EquityZen pretending like we were interested. The emails that we get from them regularly inform us of up and coming offerings, and it’s quite tempting to pull the trigger on some firms we’ve covered before on Nanalyze. Someday, we’ll get there.
So there you have it, the three fastest horses in the race to enable retail investors with the ability to invest in startups right alongside today’s most notorious venture capitalists. If you’re wondering how much money you’ll need to invest in a single startup, amounts vary from $10K to $50K USD depending on the situation. Of course, that’s pocket change for all you accredited investors who are pulling down at least $200K a year.
The purpose of this article was to provide retail investors an answer to the often-asked question, “how to buy shares of stock in startups?” We’ve given you three solid options above, but that’s not to say there aren’t other companies out there offering the same sorts of platforms we’ve talked about. Shares in startups aren’t the only illiquid asset class. Realty, art, and early-stage angel investments have been difficult for your average retail investor to access. Firms like NASDAQ Private Markets transact in all sorts of illiquid assets, $17 billion worth so far, but they’re off limits for retail investors.
All these new fintech startups are promising to change the landscape for retail investors, giving you even more ways to squander your hard-earned dollars if you’re not careful. Nothing is a sure bet, and you should always make sure the lion’s share of your investment dollars are tucked away in “safe” assets before dabbling in these risky spaces. Unless of course, you’re one of those people who know better than those broken venture capitalists, in which case, put it all on red. Hero or zero, baby.
Update 6/1/2020: Equidate was renamed Forge following a round of new investment at the beginning of 2019. The new entity Forge and Sharespost have announced their merger on 5/12/2020 pending regulatory approval.
Here at Nanalyze, we hold the lion's share of our investing dollars in a portfolio of 30 dividend growth stocks. Find out which ones in the Quantigence Dividend Growth Investing report freely available to Nanalyze Premium subscribers.